Apple Inc. (AAPL) is set to release its fiscal first-quarter earnings after the bell on Tuesday and the anxiety among market participants is palpable.
Shares of the Cupertino, California-based tech giant were relatively flat near the open as the market awaits a sign on whether Apple really did call the bottom when it gave investors early insight into the state of its business as the month began.
Many will recall that CEO Tim Cook gave the market pause on Jan. 2 with a letter to investors detailing the disappointment they were in for with this quarterly report.
"We can't change macroeconomic conditions, but we are undertaking and accelerating other initiatives to improve our results," Cook commented in the letter. "This is one of a number of steps we are taking to respond."
Cook largely blamed China for the light quarter, noting that a slowing economy has produced a contraction in that nation's smartphone market.
Apple subsequently lowered expectations for the quarter, reducing revenue guidance to $84 billion. That figure was well below the range of $89 billion to $93 billion it put forth in its previous earnings release and was meaningfully below consensus expectations of $91.49 billion. Apple also tempered margin guidance below consensus.
Apple's move to pre-announce its revenue numbers precipitated a spate of price target trimming on Wall Street and a slide in the company's share price to its lowest point in nearly two years and about 35% off its 2018 highs.
Given the low expectations for the quarter that ended Dec. 29 and the belief that much of Apple's bad news for that period is now digested, many market participants are looking ahead for Apple's take on the year ahead.
"The main thing to focus on here is management's guidance for the March quarter as a decline in unit sales and deceleration of Services growth are the main concerns atop investors' minds," the Action Alerts PLUS team noted. Apple is a holding of Jim Cramer's Action Alerts PLUS charitable trust.
Signals So Far
So far, signals for unit sales, especially from the semiconductor space, have not been overly encouraging as Apple suppliers such as Taiwan Semiconductor Manufacturing Co. (TSM) forecast further pain in smartphones driven by persistent weakness of Chinese consumers.
"Moving into first quarter 2019, we anticipate our business will be dampened by the overall weakening of the macroeconomic outlook, mobile product seasonality and high levels of inventory in the semiconductor supply chain," Taiwan Semiconductor CFO Lora Ho told analysts in a conference call earlier this month from the company's Hsinchu, Taiwan, headquarters.
Taiwan Semiconductor made clear the inventory issue is due to lower demand and not a supply glut, and Ho tied it specifically to high-end smartphones such as those manufactured by Apple.
"I will say it's more due to the sudden throw-up in the demand rather than some hidden inventory that we did not see," CEO C.C. Wei added according to a transcript. "[The] high-end smartphone is one thing, declining demand."
Jim Cramer added that even after Apple's pre-release, many unanswered questions remain.
"There are too many unanswered questions: weakness in China, cellphones a losing category, Qualcomm (QCOM) a factor, Chinese government subtly suggesting buy Huawei now that it is shut out of the west," Cramer said in outlining a list of impacts motivating further downside risk.
The questions about China, which is pivotal for smartphone sales, have not become any clearer, either, as the U.S. Department of Justice chose Monday evening to unveil sweeping criminal charges against Apple's chief competitor, Huawei Technologies.
Apple's place as a symbol of America and as rival to the embattled Huawei will certainly not endear it to the Chinese consumers it is trying to coax into buying Apple products.
Shift to Services and Wearables
In light of the ceiling on smartphone sales, the onus is on Tim Cook and his executive team to shift the narrative to services and accessories in the view of many analysts, something the company has been trying to do since cutting smartphone forecasts from guidance last November.
Services revenue has been a bright spot for the company in its tough times recently, growing to $10.8 billion according to Cook's pre-announcement.
"Our non-iPhone businesses have less exposure to emerging markets, and the vast majority of Services revenue is related to the size of the installed base, not current period sales," Cook esaid, noting the insulation of the trend from macro risks.
He added that Apple will continue to build its services business, which has been signaled already by persistent rumors about the company's endeavors to expand its efforts in streaming, gaming and health.
"You will see us announce new services this year. There will more things coming," Cook said in an interview with Jim Cramer earlier this month. "I believe it'll be material over time."
The CEO highlighted health care initiatives in particular as something that can shift the narrative for the company in the long term.
"I believe, if you zoom out into the future, and you look back, and you ask the question, 'What was Apple's greatest contribution to mankind?,' it will be about health," Cook told Cramer.
Apple's agreement with CVS Health (CVS) insurance firm Aetna, announced on Tuesday morning, offers something tangible to Cook's vision. (CVS also is a holding of Action Alerts PLUS.)
Under that initiative, the Apple Watch, a segment that has been growing alongside wearables such as Air Pods and iPads, will be used to track the activity of users much like the popular FitBit (FIT) . The tracking will add to the watch's EKG capability to catch atrial fibrillation and irregular heartbeat for health-conscious consumers.
Still, smartphones remain representative of over 60% of revenue for the company, indicating the shift in the narrative is a sticky one.
As shares remain largely flat, the market seems to be indicating that Apple will need to prove itself with its quarterly report before investors are ready to pile back into the stock.